NY Post reported that Uber (Private:UBER) and Amazon (NASDAQ:AMZN) are launching a new food delivery app in a move to scale up their respective ecosystem. For Uber, the company is expanding beyond ride-sharing after establishing some market share stability in the space but more importantly leveraging its army of freelance drivers to drive a new business initiative. As for AMZN, food delivery is another component of the Prime ecosystem that will continue to attract new users while retaining existing ones. In the long run, AMZN could potentially transform food delivery into other last-mile delivery services for its merchandise, thereby effectively expanding its logistics fleet to drive future growth.
I remain bullish on AMZN given that it's leveraging Prime services in media, logistics, cloud services and food delivery to drive its core e-commerce growth. Although Q4 earnings showed that near-term investment will continue to weigh in on profitability, investors should take a long-term view on the stock given that 1) e-commerce penetration is still low in the US relative to China, which necessitates growing spending in logistics infrastructure, and 2) near-term spending is necessary to protect AMZN's ecosystem and stickiness to drive long-term revenue growth. As the last-mile delivery network is gradually being built, the dividend from AMZN's existing investments will be more evident. I reiterate AMZN to be my near-term top pick in e-commerce.
Both AMZN and Uber are rolling out their mobile food delivery app as the ecosystem battle takes hold at the local level. This trend is prevalent in Asia where Alibaba (NYSE:BABA) is investing heavily in its Koubei platform and Ele.me is the leading food delivery app in China. The ultimate objective is for both internet companies to enhance their ecosystem offering, drive engagement and generate sustainable revenue stream.
To be clear, the food delivery business is highly fragmented with multiple contenders besides Uber and AMZN. Notably, Grubhub (NYSE:GRUB) has over 6.75m active diners last year, a growth of +34% y/y. Other competitors include Seamless, Delivery.com, DoorDash, Postmates and Favour. Although these start-ups have an early mover advantage over both Uber and AMZN, their user base is less competitive. I note that AMZN can easily cross-sell Prime food delivery services to its estimated 50m Prime users, which dwarfs that of GRUB's user base. Although Uber does not disclose its user numbers, the company did book over 150m rides last year and could potentially have close to 1m active users (but these users typically have higher spending to offset the lower user count). Long-term speaking, food delivery will diversify Uber's service offering from purely ride-sharing. As for AMZN, the local delivery fleet could potentially be transformed into its own logistics fleet that can oversee last mile merchandise delivery, thereby lessening the reliance AMZN has on USPS.
The start-ups may not have the sufficient capital to scale and to compete against Uber and AMZN. However, where they can compete is on pricing. Uber's commission rate on the bill is 30% while Amazon also is charging a similar rate at 27.5%. This is considerably higher than the 12-24% that Grubhub and Seamless charge restaurants for food orders and the 15-23% charged by rivals such as Delivery.com, DoorDash and Postmates. To protect their market share, the start-ups could lower the commission rate to the 5-10% level to prevent merchants from defecting to AMZN and Uber. This could potentially be an attractive proposition to the mom-and-pop shop that operates on razor thin margins already, allowing the higher-end restaurants to gravitate toward the internet giants.
Conclusion, the entry into food delivery by Uber and AMZN is a positive toward building their respective ecosystem. I remain bullish on AMZN as I see it is one of a few e-commerce companies that has successfully expanded into services rather than sticking with pure e-commerce model.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.